New foreclosure data out today illustrates two important trends. One is that the problem has spread from adjustable rate loans to borrowers with bad credit to prime borrowers, an indication that the weak economy and job market is impacting peoples’ ability or willingness to pay. The other some what counterintutitive trend is that the hardest hit markets are Sunbelt states, not in the Rustbelt where job losses are the greatest.
Two explanations here. One is that people in those Sunbelt states, directly or not, had incomes tied to the housing market. Secondly, when home prices fall, that severely impacts a person’s willingness to keep paying the mortgage.
According to the industry trade group the Mortgage Bankers Association, the number of foreclosures jumped 30% in this year’s first quarter. Foreclosures now account for about one out of every 70 home loans in the country. Both the level of foreclosures and the size of the increase are record highs.
The overall delinquency rate for residential mortgages was 9.12 percent at the end of the first quarter, up from 7.8 percent in the fourth quarter of 2008, and 6.3 percent one year ago. The seasonally adjusted rate is the highest in the MBA’s records going back to 1972.
The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the first quarter was 3.85 percent. Both the foreclosure inventory percentage and the quarter to quarter increase are record highs.
The combined percentage of loans in foreclosure and at least one payment past due, meaning the percentage of mortgage holders not current on their mortgages, was 12.07 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey. Put another way, one out of every eight home loans in the country is in some form of distress.
“The rate of foreclosure starts remained essentially flat for the last three quarters of 2008 and we suspected that the numbers were artificially low due to various state and local moratoria, the Fannie Mae and Freddie Mac halt on foreclosures, and various company-level moratoria,” said Jay Brinkmann, the MBA’s chief economist. “Now that the guidelines of the administration’s loan modification programs are known, combined with the large number of vacant homes with past due mortgages, the pace of foreclosures has stepped up considerably.”
The association notes that the foreclosure problem has shifted from subprime to option ARM loans and prime loans. The foreclosure rate on prime, fixed-rate loans has doubled in the last year and now represents the lion’s share of troubled loans.
As has been the case since the start of the bust, most of the trouble is concentrated in four, former housing bubble states. Some 10.6 percent of the mortgages in Florida are now in the process of foreclosure. In Nevada it is 7.8 percent, Arizona 5.6 percent and California 5.2 percent. In comparison, the states with the highest foreclosure rates in the hard hit Midwest were Michigan and Illinois at 1.5 percent and Indiana and Ohio at 1.3 percent.
“Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve,” said Brinkmann. “MBA’s forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010. It is unlikely we will see much of an improvement until after that.”
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.